959 F.2d 677 (7th Cir. 1992), 91-2589, Bankers Trust Co. v. Old Republic Ins. Co.

Docket Nº:91-2589, 91-2707.
Citation:959 F.2d 677
Party Name:BANKERS TRUST COMPANY, Plaintiff-Appellant, Cross-Appellee, v. OLD REPUBLIC INSURANCE COMPANY, et al., Defendants-Appellees, Cross-Appellants.
Case Date:April 03, 1992
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 677

959 F.2d 677 (7th Cir. 1992)

BANKERS TRUST COMPANY, Plaintiff-Appellant, Cross-Appellee,



Defendants-Appellees, Cross-Appellants.

Nos. 91-2589, 91-2707.

United States Court of Appeals, Seventh Circuit

April 3, 1992

        Argued Feb. 21, 1992.

Page 678

[Copyrighted Material Omitted]

Page 679

        Terry M. Grimm, George C. Lombardi, Winston & Strawn, Robert N. Hermes, Gerald G. Saltarelli, argued, Mary L. Hayes, Butler, Rubin, Newcomer, Saltarelli, Boyd & Krasnow, Chicago, Ill., for Bankers Trust Co.

        Bruce R. Meckler, argued, Steven D. Pearson, Pope & John, Chicago, Ill., for Old Republic Ins. Co., Chicago Underwriting Group, Inc. in No. 91-2589.

        Brian Frankl, Peterson & Ross, Chicago, Ill., for Employers Ins. Co. of Wausau.

        Robert J. Lepri, Trizna & Lepri, Daniel J. Fumagalli, Fumagalli & Tecson, Chicago, Ill., for Lee Keeling & Associates, Inc.

        Barry L. Kroll, Williams & Montgomery, Chicago, Ill., for Imperial Cas. & Indem. Co.

        Richard A. Devine, Michael M. Marick, Bruce R. Meckler, argued, Steven D. Pearson, Michael K. Bartosz, Pope & John, Chicago, Ill., for Old Republic Ins. Co., Chicago Underwriting Group, Inc. in No. 91-2707.

        Before POSNER and MANION, Circuit Judges, and VAN SICKLE, Senior District Judge. [*]

        POSNER, Circuit Judge.

        This appeal and (conditional) cross-appeal bring up to us a tangle of jurisdictional and procedural issues arising out of complex federal litigation. Back in the early 1980s, Bankers Trust, a large bank, made a large loan in (alleged) reliance on appraisals of the borrower's oil and gas reserves by Lee A. Keeling & Associates, Inc. ("LKA"). The borrower defaulted and Bankers Trust lost $30 million. In 1985 it brought a diversity tort suit in the federal district court in Oklahoma against LKA, charging that the latter had negligently overestimated the borrower's reserves. That suit is still pending, with trial finally scheduled for this coming May. In 1986, Old Republic Insurance Company, which had issued a liability insurance policy to LKA, brought a diversity suit in federal district court in Chicago against its insured, seeking to rescind

Page 680

the policy on the ground that LKA had known when it took out the policy that Bankers Trust might sue it, and had in breach of a condition in the policy failed to warn Old Republic of this possibility. Cf. Truck Insurance Exchange v. Ashland Oil, Inc., 951 F.2d 787 (7th Cir.1992). The following year, Bankers Trust filed the present suit, which is also a diversity suit, against Old Republic. It seeks a declaration that if Bankers Trust wins a judgment in the Oklahoma suit, Old Republic must indemnify LKA up to the limits of the policy. Two months after this suit was filed, Old Republic settled its suit with LKA. The parties agreed that Old Republic would be liable on the policy only up to $425,000. Bankers Trust then amended its complaint in the present case to add a count charging that the settlement was fraudulent and should not affect Old Republic's contingent duty to indemnify LKA for up to $3 million of any judgment that Bankers Trust should win in Oklahoma. Although Old Republic is merely an excess insurer of LKA, the primary insurer claims to have exhausted its policy limit of $2 million in the pretrial phase of the Oklahoma suit, which the primary insurer is defending on LKA's behalf.

        Old Republic moved to dismiss Bankers Trust's complaint on the grounds that it failed to plead fraud with the particularity required by Fed.R.Civ.P. 9(b) and that Bankers Trust, though not a party to Old Republic's suit against LKA, was bound by the settlement of it. The district judge denied the motion, 697 F.Supp. 1483 (N.D.Ill.1988), but later dismissed the suit on the ground that until Bankers Trust obtained a judgment against LKA it would have no actual "controversy" with LKA's insurer within the meaning of Article III. Bankers Trust appeals the dismissal. Old Republic has filed a cross-appeal attacking the judge's 1988 ruling in the hope that, should we disagree with the judge's later ruling and conclude that there is jurisdiction, we shall order the suit dismissed anyway--on the merits.

        In support of the district judge's jurisdictional ruling Old Republic cites cases in this circuit which say that a suit to determine an insurer's obligations to indemnify its insured is premature until the insured has been determined to be liable to somebody. Cunningham Bros., Inc. v. Bail, 407 F.2d 1165, 1169 (7th Cir.1969); Argento v. Village of Melrose Park, 838 F.2d 1483, 1492 (7th Cir.1988). Other circuits take a more liberal view. ACandS, Inc. v. Aetna Casualty & Surety Co., 666 F.2d 819, 823 (3d Cir.1981); Rubins Contractors, Inc. v. Lumbermens Mutual Ins. Co., 821 F.2d 671, 674 (D.C.Cir.1987); Eureka Federal Savings & Loan Ass'n v. American Casualty Co., 873 F.2d 229, 232 (9th Cir.1989). The conflict dissolves when one realizes that our cases state a general rule rather than an absolute one. Cunningham describes its rule as a principle of discretion in the grant of declaratory relief, 407 F.2d at 1169, while Argento says that "an insurer ordinarily cannot obtain a declaratory judgment as to its liability prior to the insured first being found liable." 838 F.2d at 1492 (emphasis added). On the one hand it would be absurd to suppose that a passenger planning a flight on an airline could, before emplaning, sue the airline's insurer for a declaration that in the event of the plane's crashing and the airline's being held liable to his estate yet lacking sufficient assets to pay the judgment, the insurer would be obligated to indemnify the airline up to the limits of the insurance policy. Cf. Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178, 1189 (7th Cir.1980). On the other hand we just held in the Truck Insurance Exchange case, without supposing that we were going against the circuit's rule, that once the insured's liability has been fixed by a judgment the owner of the judgment can sue the insurer for a declaration that the insurance policy will pay it. 951 F.2d at 789; see also Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941).

        This case goes a step beyond the facts of Truck Insurance Exchange because Bankers Trust may lose its suit against LKA (or win a judgment for no more than $425,000), in which event its suit for a declaration that Old Republic is obligated to indemnify LKA for up to $3 million

Page 681

of that judgment will indisputably be moot. But we do not think that this possibility takes the case out of Article III's grant of jurisdiction over cases and controversies; it is relevant rather to the district judge's exercise of his equitable discretion to grant or withhold declaratory relief and to accelerate or retard his consideration of this suit in tandem with the Oklahoma suit. We have emphasized in recent cases, for example Wooten v. Loshbough, 951 F.2d 768, 769 (7th Cir.1991), that Article III requires only a probabilistic injury. Of course this doesn't mean that any probability, however slight, of injury is enough to permit a suit to be maintained in federal court. We are dealing with matters of degree. In our hypothetical case of the airline passenger, the probability of injury (literally) is too slight; the passenger is seeking advice to help him decide whether to fly rather than a declaration of his rights against someone with whom he has a controversy. This case is different. There is a real disagreement between Bankers Trust and Old Republic, with the former believing that the $3 million policy that Old Republic issued to LKA is valid and Old Republic believing not; and it is not an academic disagreement--Old Republic would not have...

To continue reading